INFORMATION RELEASE – Additional information sought by Provincial Government in the Inquiry Respecting Site C November 16, 2017 Vancouver – The British Columbia Utilities Commission (BCUC) received the attached joint letter from the Ministry of Energy, Mines and Petroleum Resources and Ministry of Finance yesterday seeking additional information in the BCUC’s Inquiry respecting Site C. The joint letter states that the ministries are supporting the government decision process surrounding the future of the Site C project. In addition to commending the BCUC for completing the Inquiry in an abbreviated timeframe, the letter appends detailed questions for the BCUC on a number of points in the Inquiry Panel’s full report. The BCUC’s Inquiry into Site C was initiated by Order in Council No. 244 on August 2, 2017. The additional questions posed by the ministries do not constitute a reopening of the Inquiry. The BCUC will strive to provide clarification in a written response as soon as possible. The BCUC is a regulatory agency responsible for oversight of energy utilities and compulsory auto insurance in the province of British Columbia. It is the BCUC’s role to balance the interests of customers with the interests of the businesses we regulate. The BCUC carries out fair and transparent reviews of matters within its jurisdiction and considers public input where public interest is impacted. CONTACT INFORMATION: Erica Hamilton Director, Communications Phone: 604.660.4727 Email: erica.hamilton@bcuc.com Website: http://www.bcuc.com BRI I SH (:01 November 15', .2017 Ref.: 102700 Mr. David Morton. Chair BC Utilities Commission Email: David.Morton@bcuc.com Re: Inquiry Respecting Site. C. The Ministry- of Energy, Mines and Petroleum Resources and Ministry of Finance are Supporting the government decision process surrounding the future of the Site project. On behalf of our respective Mlnisters We Would like to thank the BC Utillties CbmmiSsion (Commission) for the report Inquiry Respecting Site C. Completing an inquiry of this scope over an abbreviated timeframe and with high levels of public- and First Nations input is- a. considerable achievement. As our ministries analyze the Commission?s report, along with other implications associated. with government proceeding with Or terminating the Site project, We Want. to ensure that we fully understand the assumptions and computations that-the Commission made-in the analysis of potential alternative sourcesof energygeneration and capacity. Accordingly, We are requesting further- explanation or additional. information on the puints listed below and in the Appendix attached to this letter. 1. Did. the Commission include sunk costs (the estimated $2.1 billion that has been spent to date on the project) and termination costs (the $1 .8 billion determined by the Commission) in. comparing the crisis to ratepayers of cempleting Site against the Costs of pursuing an alternativeportfolio of generation rescurces? .We were not able to determine. Whether the sensitivity analysis included on Page 17 of the report?s executive summary-includes sunk cOSts' and termination costs consistently. If it does not, Could the Commission advise on how incliIding these sunk and termination costs might change the cost to ratepayers and the unit energy cost (UEC) in. both scenarios? 2.- In the event that goVernmentelectsto terminate the SiteC project, has the- Commission assumed that BC Hydro would develop and ?nancethe' projects Page 1 of 3 Ministry of Of?ce of the Mailing Address: Location: Energy, Mines and Deputy Minister PO Box 9319, Prov Govt 81h Floor, 1810 Blanshard Street PetroleUm Resources Victoria, BC V8W 9N3 Victoria Telephone: .250 952-0120 Website: Facsimile: 250 952-0269 included in. the alternative portfolio (Wind, :geothermal).rather than independent power producers We ob'servegthat'the Commission has in some Cases used BC Hydro?s-lower cost of Capital ?nancing to calculate the cost of the alternative portfolio presented in the repert, affecting the valuation of those projects. Could the CommisSiOn offer its View of the impactthat a higher-ecst of capital would haveon?ratepayers if the alternative portfolio were. developed by independent poWer producers rather than directly by BC Hydro? 3. Government will need. to. consider the. total cost of potential demand side management initiatives (rather than just the utility?s costs) as it considers" the alternatiVes. Could the CommisSio'n advise: how-theinquiry cries of Reference led to assessing demand.- side measures; based on the Utility Resource Cost standard, when Total Resource Cost has been the standard for prior Commission proceedings? If the Site project 'were terminated, the $4 billion sunk and remediation costs would need to be 'recovered, and the amortization period of that recovery would affect. BC Hydro rates.- Could the. Commission. please clarify whether it assumed that that these. costs would. be recovered over 10, '30 or 70 years? 0 Fair and appropriate rater-setting principles for rate?regul?ated utilities typically aim to. avoid causing ?futuregenerations to pay for investments from which they will derive no bene?t. 'Fromthe Commission?s perspectiye, can recovery of the sunk and remediation costs of Site over longer periods. o.f.3i0 to. 70 years remain consistent with these inter-generational principles? 0 Recently it has been stated. that recovering'the pr'oj ect?s sunk and remediation costs" over. 10-year period. would lead to a 1.0 percent hike in BC Hydro rates. Is this aSSerti'on consistent with; the Commission?s thinking? We are unaware of prior- instances when anything other".thanBC Hydro?s- mid-load forecast has. been used. for planning purposes. For that reason, we would like to clarify]; - Did'the' Commission assume lower demand for electricity (re?ected in the low- .load fereeast used in. the report) because. it is- ferecasting :a period of lower economic growth "for the prOvinee in which imaj or power consumers such as mining, forestry, technology and commercial sectors are in decline? 0- Does the CommissiOn include "in its load forecast the potential increased'e'lectrical- power demand of meeting the province?s Stated objectives. to reduce greenhouse gas emissions through greater electri?cation of?our economy? Page. 2 of 3 We sincerely appreciate the Commission?s timely response to these questions and requests for clari?cation. Government has committed to making a decision on the Site project before the end of the year. The Commission?s responses to our questions will assist our ministries in better understanding the report and the assumptions that underlie it as we prepare advice to support government in making a decision that will be in the best interests of British Columbians. . x" .I if I Dave Nikolejsin Lori Wanamaker Deputy Minister Deputy Minister Ministry of Energy, Mines Ministry of Finance and Petroleum Resources Attachment Page 3 of 3 Appendix: Detailed Questions for-the. Commission We'understand that; while BC Hydro modelled over; 60 scenarios and tested various assumptions including a number of alternatives requested by the Commission, the alternative porthlio that the Commissibn included 1n the ?nal repOrt Was not- analyzed using BC IIydro.? modelling tool's. On this basui's government has asked BC Hydro to provide an assessment of the model used to develop the Commission ?nal alternative portfolio. BC Hydro will provide. the Commission with the results of that assessment separately. In our initial analysis of thereport, 'our ministries have identi?ed several areas that we would appreciate the Commission?s feedback on. Several of our questions relate to the: impactof Certain assumptions made in the report: and .how the Costs of those assumptions would be recovered from ratepayers. We understand that BC Hydro follows standards for rate-regulated utilities in-its ?nancial statements-and in preparing-its applications for review by the. Commission. This accounting framework follows a. number of principles in relation to the unionization of capital assets and the-deferral .of other 'cOsts- fer the purpose of matching. recoveries from ratepayers to periods .oVer which bene?ts are provided. It would be helpful if the Commission could clarify how the choices of. cost ainOrtizati'on and recovery peliods 1n the Termination scenario fit within appropliate utility rate- -se_tti11g principles that recognize and avoid unnecessaiily transferiing current utility costs to ?iture user generations when there are clearly no longer dilectly-related assets or bene?ts being provided. Such decisions lead rate? regulated accounting plactice and use of regulatory accounts, which a1e areas of _partlcular interest. by the p1o'vincial Auditor General as. Well as credit: rating agencies. The Commission?s process involved some deliberations on the cost of capital. The alternative. portfolio presented inthe report assumes that BC Hydro will ?nance all new resources on its balance sheet. However, other than redevelOpment of existing sites and Site C, BC Hydro has, for almost three primarily procuring new supply from competitive processes or bilateral agreements that are benchmarked to competitive- processes. This effectively means that BC Hydro avoids assuming such. debton its balance sheet and only recognizesthe incremental costs of. new energy purchases Which Would include the private. sector?s annual debt servicing costs and equity return within approved purchase. contracts. It would be helpful to understand how the. Commission assesses the impact on ratepayers of the additional. debt associated with the und?erl'ying'fthe alternative portfolio. We would particLilarIy appreciate bette1 understanding the Commission?s approach to using BC Hydro? 3 cost of capital f01 IPP projects and the apploaeh used for- the cost of capital faced by an IPP e. what IPPs actually pay) and the resultant rate impacts Fer example on page 159- 160 the Commission appears to conclude that, IPP ?nancing 1s the relevant assumption for the altelnative- portfolio and the BC Hyd1o financing assumption should only be used for the Unit Energy Cost. (UEC) analysis. However, on pages 167., 170 and Appendix C. (Assumption. it. appears that the Commission has used BC Hydro ?nancing (100% debt ?nancing at a cost of 3. 43%) for the alternative portfolio. If we are. interpreting this correctly, we would appreciate Clari?cation on which cost of capital should be USed 1n analysing rate impacts BC Hydro has suggested that recovery in rates of-sunk costs in a termination scenario Should occur over a. 10-year period. If the project were to Continue as planned, the sunk costs, as part of the overall project costs, will bereco'Vered over a_ 70-year period, consistent with the amortization of the Site asset. The Commission model appears to exclude sunk costs in the termination scenario, and has removed those costs from the completion Scenario as Well. Effectively this assumes that sunk costs will be recovered through rates over 70 years if the project is. terminated. Recovering costs 111 rates. ovel a shorter period has a material impact on the. costs ofthe alternative portfolio. It Would be :helpful if the Commission could provide an estimate of the impact on rates of usingthese two timeframes- The tables on page 17 of the-executive summary and page 170 in. the main report include a-summary of the Commission?s-sample scenarios showing the effect of modifying one or mere variables to the resulting Net PresentV-alue cost to-ratepayers. As noted abdve, the - Commissi0n?s alternative portfolio :doesnm appear 'to? include-sunk costs,- and-sunk-eosts- -- have. also been remOVed on the continue scenario. The tables. also include UECs. For the Site C. scenario, the UECs re?ect costs, including sunk costs, of Site being either $10 billion or $12 billion depending-on assumptions. Our review of the Commission report suggests that the alternatiVe portfolio does: not include. termination costs. It wOuld be helpful if the Commission c0uld con?rm this and provide a version of the UEC. portion of the table with termination costs included ?in the alternative This Would help provide a consistent basis for comparing costs between the scenarios of completing or- terminating. the project. It is our understanding thatfin previous; proceedings the Commission has concluded that the Total Resource. Cost (TRC) test is the appropriate way to evaluate demand side management (DSM) in. comparison to other resources. In this inquiry, the- Commission?s mOdel uses the Utility Resource Cost (URC).standard. We believe that using the URC may underestimate the actual cost of DSM to ratepayers. It w'0uld be helpful for usto understand the Commission?s rationale. in choosing a test methodology that differs from past practice. Could. the. Commission confirm that the TRC test remains the appropriate metric, and if so, whatimpact would this have on the analysis? 'We have noted that the Commission has concluded that BC Hydro"s low loadfore?cast was most appropriate for an assessment of the need for the capacity of Site C. It would be helpful. fer us to further understand the rationale, andwhether the assessment includes the load requirements needed to meet the, Province-?s. Clean. Energy Act energy objectives of: 0 Reducing. greenhouse gas emissions by 2050 by 80% 'less'than 2007 levels; 0 Encouraging the switching from one kind of energy source or use to another that decreases. greenhouse-gas emissions in British Columbia; and, - Encouraging communities to reduce greenhouse gas emissions and use energy ef?ciently. It would also be useful to know if the CommissiOH examined the value of ?diSpatchable? resources versus intermittent resources, particularly as applied to the goal ofimoving industrial energy requirements now and in future to low carbon electricity. It has been government?s assumption that electri?cation with low carbon electricity would be a-keyinitiative to achieve greenhouse. gas reductions. The provincial gOVerntnent is working: with the Government of Canada on electricity system in?'aStr'uc'ture investments tored'uce and avoid greenhouse gas emissions, .and has enabled BC?I-Iydro to pursue electri?cation initiatives under the Greenhouse-Gas Reduction (Clean Energy) Regulation under the Clean Energy Act. It would be. helpful for our ministries to understand if the Commission has a different outlook, and. if the Commission could further describe the. impact on its analysisof electri?cation initiatiVes to meet greenhouse gas reduction-objectives. The report identi?es an aggreSSive DSM program, coupled With load curtailments as a way? to achieve the alternative portfolio scenario". "We would appreciate further information from the Commission on .how? such load curtailnients would practically be achieved in- the natural resource sector without impairing operations, jobs and economic growth for sectors already facing trade sanctions and pressures. We understand that BC Hydro has provided the Commission with a description of its View of what economic environment would look like under a low load outlook scenario. It would-helpful if the Commission could further describe. its interpretation of the low lead outlook. We obserVe that the Commissionis Vi'ewis'that?the outlook could be even lower than that presented in BC Hydro-?s loweload. scenario, and we are interested in understanding how-that outlook is based on realistic economic sustainability around which the alternative portfolio would be premised.